N.C. Business Court Opinions, February 1, 2023 – February 14, 2023
Downing v. Cycle Holdings, Inc., 2023 NCBC 10 (N.C. Super. Ct. Feb. 1, 2023) (Davis, J.)
Key Terms: N.C.G.S. § 55-16-02(h); inspection rights; voting agreement; Delaware law
Plaintiff, a shareholder of Defendant Cycle Holdings, filed this action seeking an order allowing him to inspect the corporate records of Defendant Cycle Labs, in which Cycle Holdings held shares. At issue on the parties’ cross-motions for partial summary judgment was whether Cycle Holdings had the power to determine a majority of Cycle Labs’ directors for purposes of N.C.G.S. § 55-16-02(h). Under that provision, a qualified shareholder of a corporation that has the power to determine a majority of directors of another corporation has inspection rights as to the other corporation. The parties disputed whether Cycle Holdings had this power due to a voting agreement between Cycle Labs and its shareholders, which purported to require that Cycle Holdings vote its shares in such a way that it did not, in fact, have the power to determine a majority of Cycle Labs’ directors. Plaintiff asserted that the voting agreement was invalid because any change to Cycle Holdings’ voting rights could only be effectuated through an amendment to Cycle Labs’ certificate of incorporation. Defendants contended that the voting agreement did not conflict with the certificate of incorporation and only contained permissible restrictions on how Cycle Holdings would exercise its voting rights.
Applying Delaware law (since Cycle Labs was a Delaware corporation), the Court determined that the voting agreement did not impermissibly take away Cycle Holdings’ voting power, but instead simply constrained the manner in which it could exercise that power. Thus, under Delaware law, the voting agreement was valid and therefore Cycle Holdings did not have the power to determine a majority of Cycle Labs’ directors for purposes of N.C.G.S. § 55-16-02.
Maxwell Foods, LLC v. Smithfield Foods, Inc., 2023 NCBC 11 (N.C. Super. Ct. Feb. 3, 2023) (Conrad, J.)
Key Terms: output contract; most-favored-nation clause; breach of price term; notice pleading; fraudulent concealment; duty to disclose; estoppel; statute of limitations
Since 1994, Plaintiff Maxwell supplied swine to Defendant Smithfield under an output contract and related documents which included a most-favored-nation clause. Maxwell filed suit alleging various breaches of the parties’ agreements, including violating the most-favored-nation clause. After discovery, Maxwell amended its complaint, adding claims for breach of price term and fraudulent concealment of breaches of the most-favored-nation clause. Smithfield moved to dismiss these claims.
Regarding fraudulent concealment, the Court dismissed this claim after determining that Maxwell did not allege that Smithfield had any duty to disclose. The parties’ contractual relationship did not give rise to such a duty. Moreover, Maxwell failed to adequately allege facts showing affirmative acts of concealment which would have given rise to the duty. Although Maxwell alleged several false statements by Smithfield, each lacked the necessary particularity or were otherwise insufficient.
In its complaint, Maxwell alleged that Smithfield was estopped, due to its fraud, from asserting the statute of limitations defense to Maxwell’s claim for breach of the most-favored-nation clause. In response, Smithfield argued that estoppel failed due to the dismissal of the fraud claim and, therefore, the statute of limitations barred Maxwell’s claim for breach of the most-favored-nation clause to the extent it was based on conduct occurring before 2016. The Court declined to undertake an allegation-by-allegation application of the statute of limitations and suggested that such a dispute would be better suited for summary judgment.
Regarding breach of price term, Smithfield asserted that the claim should be dismissed because it did not allege the specific provisions of the agreement that were breached. The Court rejected this argument, concluding that Maxwell had satisfied North Carolina’s notice pleading requirements by alleging the existence of a contract, which was attached to the complaint as an exhibit, and that Smithfield had breached that contract by underpaying.
Loray Mills Devs., LLC v. Camden Loray Mill Phase 1, LLC, 2023 NCBC 12 (N.C. Super. Ct. Feb. 7, 2023) (Bledsoe, C.J.)
Key Terms: summary judgment; statute of limitations; breach of contract; declaratory judgment; continuing wrong doctrine; equitable estoppel; discovery rule; breach of fiduciary duty; constructive fraud; derivative claim; economic loss rule; conversion; intangible interest; unjust enrichment; civil conspiracy
This case involves a dispute between the two principal owners of the Loray Mill project, an urban revitalization and historic preservation project in Gastonia. Plaintiff JBS and Defendant Camden entered into substantially identical operating agreements for various entities formed as part of the project. Each operating agreement permitted JBS to make a capital call for an additional contribution under certain circumstances, and to the extent any member failed to make an additional distribution, permitted any other member to make the additional contribution and treat it either as a loan or, if certain requirements were met, a capital contribution. After JBS made a number of capital calls which Camden did not participate in, a dispute arose regarding the effect the capital calls had on Camden’s ownership interest in the various entities. Plaintiffs brought suit for a declaratory judgment and for breach of contract and Defendants counterclaimed asserting twelve claims. Both sides moved for summary judgment.
Declaratory Judgment Claims. After determining that Georgia law applied to two of the operating agreements and both Georgia and North Carolina law applied to a third, the Court turned to Defendants’ arguments that the capital calls did not dilute their interests because they were inconsistent with the terms of the operating agreements and, as to one entity, were not made specifically for that entity. The Court rejected these arguments because of conflicting evidence and arguments regarding the meaning and interpretation of certain terms and provisions in the operating agreements and whether the parties’ course of conduct modified the operating agreements. Accordingly, summary judgment was denied.
Plaintiffs’ Breach of Contract Claim. Because this claim appeared to depend upon the parties’ competing claims for declaratory judgments, which the Court had already concluded must be resolved at trial, the Court denied Defendants’ motion for summary judgment.
Defendants’ Breach of Contract and Breach of Fiduciary Duty Counterclaims (pre-April 2018). Plaintiffs argued that these claims were barred by a three-year statute of limitations based on undisputed evidence that Defendants were on notice of the alleged breaches more than three years before the counterclaims were filed. In response, Defendants relied upon the continuing wrong doctrine, the discovery rule, and equitable estoppel principles to argue that their counterclaims should survive. The Court rejected each defense in turn. The continuing wrong doctrine did not apply because each of the alleged breach involved separate discrete acts. The discovery rule also did not save the claims because the evidence showed that Defendants were sufficiently aware of the alleged misconduct well before they claimed they were. Finally, equitable estoppel did not apply because the evidence showed that Defendants were put on inquiry as to the truth but did not seek additional information. Accordingly, the Court found that the statute of limitations barred these counterclaims and granted Plaintiffs’ motion for summary judgment.
Defendants’ Breach of Contract and Declaratory Judgment Counterclaims (post-April 2018). The Court determined that issues of fact remained on these claims and denied summary judgment.
Defendants’ Breach of Fiduciary Duty and Constructive Fraud Counterclaims against JBS. As for Defendants’ derivative counterclaims based on the capital calls, the Court determined that because the counterclaims only sought to remedy Defendants’ own injuries, they were direct rather than derivative claims, and therefore, Defendants did not have standing to bring them. As for Defendants’ derivative and direct counterclaims based on JBS’s payment of unbudgeted expenses, the Court concluded that JBS’s fiduciary duties arose from the operating agreements; thus the counterclaims were barred by the economic loss doctrine.
Defendants’ Conversion Counterclaim. The Court dismissed this claim because it was based on conversion of tax credits, which are an intangible interest not subject to a claim for conversion.
Defendants’ Unjust Enrichment Counterclaim. The Court dismissed this claim based on the parties’ agreement that the operating agreements governed their contract claims.
Defendants’ Civil Conspiracy Counterclaim. Lastly, the Court dismissed this claim because it was based on the same conduct as the counterclaims for breach of fiduciary duty and constructive fraud, which were also dismissed.
BIOMILQ, Inc. v. Guiliano, 2023 NCBC 13 (N.C. Super. Ct. Feb. 10, 2023) (Robinson, J.)
Key Terms: motion to dismiss; equitable distribution; misappropriation of trade secrets; trademark infringement; UDTPA; trespass to chattels; patent ownership; subject matter jurisdiction; stay
This action arose from a dispute between the parties regarding certain human cell-cultured technologies and products. The dispute focuses on Defendant Guiliano’s conduct in February 2022, when he photographed pages of a BIOMILQ-issued notebook containing trade secret and confidential information, which was in the custody of Dr. Strickland, a BIOMILQ employee. Defendants moved to dismiss all claims under Rule 12(b)(6).
Misappropriation of Trade Secrets. BIOMILQ alleged that Guiliano misappropriated its trade secrets when he entered Strickland’s home, to which he had access, and took pictures of information in her notebook. The Court, however, dismissed the claim, concluding that BIOMILQ had not sufficiently alleged reasonable steps to maintain the secrecy of the trade secrets, since the complaint only made general statements about how the notebooks were treated.
Common Law Trademark Infringement. Analyzing this claim under federal law standards regarding infringement claims of unregistered trademarks, the Court denied dismissal, finding that BIOMILQ had adequately pleaded that it had valid rights in the BIOMILQ mark and that Defendants’ use of it was likely to cause confusion among consumers.
Unfair and Deceptive Trade Practices. Pursuant to N.C.G.S. § 80-11–13, the Court denied dismissal to the extent this claim relied on BIOMILQ’s common law trademark infringement claim. However, to the extent the claim relied on the dismissed misappropriation of trade secrets claim, it was dismissed as well.
Common Law Unfair Competition. Applying the same analysis as for the UDTPA claim, this claim survived to the extent it was based on the trademark infringement claim.
Trespass to Chattels. The Court found that BIOMILQ had adequately pleaded the first element–actual or constructive possession–based on Strickland’s custody of the notebook while an employee of BIOMILQ. Nonetheless, the claim was dismissed as BIOMILQ had not adequately alleged the second element–unauthorized, unlawful interference with or dispossession of the property. That information within the notebook may have been devalued by Guiliano’s access was not sufficient.
Declaratory Judgments. The Court denied dismissal as to the declaratory judgment claim regarding BIOMILQ’s ownership rights in certain trademarks and other information finding that an actual controversy had been alleged. The Court also denied dismissal as to the declaratory judgment claim regarding the parties’ rights to use the subject matter of certain patents. Although federal courts have exclusive jurisdiction over claims arising under federal patent law, the question of who owns patent rights is a state law issue when the ownership dispute is based on contract, rather than inventorship. Here, BIOMILQ alleged an actual controversy regarding ownership of the patents based on Strickland’s assignment of rights to Plaintiff; thus, the Court had subject matter jurisdiction over the claim and determined that an actual controversy had been sufficiently alleged.
Chi v. N. Riverfront Marina & Hotel, LLLP, 2023 NCBC Order 8 (N.C. Super. Ct. Feb. 7, 2023) (Earp, J.)
Key Terms: stipulation extending deadline; BCR 4.1; BCR 7.6
The parties filed a stipulation purporting to extend the time for Plaintiffs to respond to Defendants’ motions to dismiss. The Court struck the stipulation, explaining that BCR 4.1(e) only allows parties to enter binding stipulations for deadlines set by the North Carolina Rules of Civil Procedure. It does not allow the parties to stipulate to extensions of deadlines established by the Court’s orders or the Business Court Rules, including BCR 7.6 which governs the time frame for filing responsive briefs.
Futures Grp., Inc. v. Brosnan, 2023 NCBC Order 9 (N.C. Super. Ct. Feb. 10, 2023) (Earp, J.)
Key Terms: spousal privilege; N.C.G.S. § 8-56; standing; competent evidence; BCR 7.2
Futures Group and Geoff Cramer, its founder, sued Denis Brosnan, the father of Cramer’s ex-wife Aimee, for disputes arising from their business dealings. In opposition to Brosnan’s motion for partial summary judgment, Futures submitted an affidavit from Cramer, attached to which were audio recordings of four conversations Cramer had with Aimee while they were married. Aimee objected to two of the recordings based on spousal privilege and moved for a protective order.
The Court first determined that Aimee, even as a non-party, has standing to seek protection because she holds a personal privilege in her confidential marital communications which gives her the necessary personal stake in a justiciable controversy.
After conducting an in camera review of the conversations, the Court addressed each in turn. Regarding the first, the Court identified specific portions which were plainly not intended to be confidential because Aimee was largely acting as a messenger relaying information from her father to her husband. Such statements were not protected by the spousal privilege. The remaining portions, however, were private communications made in the confidence of the marital relationship and were therefore protected.
Regarding the second conversation, the Court determined that even though some of the same topics might have also been discussed with Brosnan at other times, Aimee nevertheless considered her statements to be confidential communications with her husband, and therefore, the entire conversation was protected by the spousal privilege.
Accordingly, the Court granted Aimee’s motion in part and ordered that the portions of the conversations protected by the spousal privilege remain under seal and not be considered competent evidence in the case.
Brosnan had also moved for a protective order but had purported to “incorporate by reference” Aimee’s brief rather than submitting his own. The Court summarily denied this motion pursuant to BCR 7.2.
Shah v. Ahmed, 2023 NCBC Order 10 (N.C. Super. Ct. Feb. 13, 2023) (Bledsoe, C.J.)
Key Terms: order on designation; contemporaneous filing
Plaintiffs filed the complaint in this action in November 2022 but did not file a notice of designation until February 2023. Accordingly, designation as a mandatory complex business case under N.C.G.S. § 7A-45.4(a) was improper because Plaintiffs did not comply with the contemporaneous filing requirement of 7A-45.4(d)(1).
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